Steven Madden Ltd. (SHOO) is well placed to generate solid returns moving forward, due to its ability to capitalize on growing macro trends such as increased female spending and the move towards e-commerce. The firm also has the potential to expand its Chinese operations moving forward. The valuation of the firm implies there is 20% upside ahead in the medium term (16 months).
China is a huge opportunity for the company going forward. This is something the CEO has himself highlighted in the recent earnings transcript. The Chinese have a love for western designer brands. There is also a huge women population there that works - ''63.3 percent of China's female population is employed, much higher than the average in Asia Pacific.'' SHOO being a designer company and also heavily targeting women gives me reason to believe that it could really generate significant profits in the region.
Although China is a huge opportunity for SHOO, the company has faced problems establishing a foothold in the country. SHOO had a joint venture with a Chinese company to open stores there. This did not work out though, and these stores are now closing down. As of writing, only one store is still open. This highlights the hard task of Steven Madden establishing itself in China. It's no easy task building brand awareness from scratch in a new country, the size of China.
SHOO is now looking at a new joint venture. It has found a stronger partner that shares its vision more appropriately. Although with a bad track record behind it, it remains to be seen just how successful this partnership will be.
Women is a huge growing market around the world. There are now more women employed than ever before and they are also earning higher salaries. SHOO is well placed to capitalize on this macro trend, with its female-focused products. This female focus is also a benefit in China - as highlighted with 63.3% of Chinese females currently in employment.
Steve Madden, the flagship brand of the company, performed really well in a tough retail environment. There was really strong performance in the wholesale footwear sector both domestically and internationally. This is due to a product range that is fitting in well with consumers, leading to market-leading results. The footwear sector saw 14% in net sales growth, which was a double-digit growth for the third quarter in a row.
SHOO is seeing rapid growth in its e-commerce website stevemadden.com which played a pivotal role in the firm's recent increase in earnings. This is a positive catalyst as we know that retail is increasingly heading online. Firms that don't stay ahead of this macro trend will end up losing out. Comparable in-store sales increased by 6.2% YoY and 5.8% through e-commerce. EPS increased 16% compared to the previous year.
SHOO trades at a relatively attractive valuation at the moment after a recent pullback. The stock has a free cash flow yield of 5.44%, which is an attractive return in the current market. These sorts of returns are unheard of in the current marketplace.
SHOO is also in a solid financial position. The firm has 200 million in cash on its balance sheet. There are total assets of 1,072,570,000 vs. total liabilities of 257,888,000. This gives the firm a Debt/Equity Ratio of 0. The liquidity ratios highlight the firm's solid balance sheet with a Quick Ratio of 2.1 and Current Ratio of 2.6. SHOO continues to be a profitable company generating operating cash flow of $154,376,000 in the year ended 2018, also similar to 2017 and 2016.
The P/E ratios based on the EPS estimates for Dec. 2019 and Dec. 2020 sit at 18.85 and 17 respectively. The five-year average P/E for the company however is 20.29. This is just below the average P/E multiple for the overall market, which is 22.17. The average P/E of the entire S&P currently sits at 22.17. Based on the 2020 Forward P/E, this represents upside of around 20% in the next 16 months.
SHOO faces pressure from the Trump administration's trade war with China. This comes in the form of certain List 3 items, such as handbags and other accessories being liable for tariffs. The tariffs were only 10% in Quarter 1 and are now 25% in Quarter 2. At the 10% level, the risk to earnings was mitigated by moving production out of China to Cambodia. The cost of production has gone up in China over the last few decades as the economy has rapidly grown. This makes a country like Cambodia a cheaper alternative. SHOO was also able to generate price concessions from factories for their goods supplied in China.
At the 25% level though, there are talks for more concessions with SHOO's manufacturers and also an increase in the selling price for goods. This is the first time the tariffs will affect consumers, and simple supply and demand states that as the price goes up, sales go down. The loss to earnings is expected to be $0.05 per share though, which isn't a huge amount. The firm has an EPS estimate of $1.84 for the year end.
We believe that the trade wars are a short-term problem for the company. If we look at things from a long-term perspective, things are positive. The company is moving production to Cambodia, which will lead to cost savings. These savings will be there when tariffs won't be needed to be paid. We don't know for sure how the negotiations with the Chinese suppliers will go after the trade war. We can expect there to be lower costs of goods from suppliers after the trade wars have finished though.
Overall SHOO is a good company to buy and hold for the long term. It remains to be seen how its expansion into China goes and any potential or current investor should keep a close eye on the situation there. The growth on e-commerce, in-store and macro trend of increased female purchases will lead to increased revenue for the firm moving forward. The firm faces short-term risks from tariffs, but as analyzed above, these actually are a positive for the company in the long term. The trade wars have suppressed the share price of the company in the short term, but provided a patient investor with an attractive entry point. We see 20% upside in the medium term.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.